We have investigated the specificity of isopeptidase T toward peptide-AMC substrates based on the C-termini of ubiquitin. The substrates investigated were Z-Gly-Gly-AMC, Z-Arg-Gly-Gly-AMC, Z-Leu-Arg-Gly-Gly-AMC, and Z-Arg-Leu-Arg-Gly-Gly-AMC and were hydrolyzed by isopeptidase T with k(c)/K-m values of <0.1, 1, 18, and 95 M(-1) s(-1), respectively. In the course of these experiments, we observed that the hydrolytic activity of isopeptidase T toward these substrates is modulated by ubiquitin in a biphasic fashion. While submicromolar concentrations of ubiquitin activate isopeptidase T, higher concentrations are inhibitory. In the activation phase, the extent of stimulation of k(c)/K-m, varies with substrate and is 8-, 50-, and 70-fold for Z-Arg-Gly-Gly-AMC, Z-Leu-Arg-Gly-Gly-AMC, and Z-Arg-Leu-Arg-Gly-Gly-AMC, respectively. K-d for ubiquitin in this phase is, of course, independent of substrate and equals 0.10 +/- 0.03 mu M. At higher concentrations, ubiquitin is inhibitory and titrates k(c)/K-m with an average Ki value of 3.0 +/- 1.3 mu M for all three substrates. To explain these observations, we propose a structural model for isopeptidase T that involves two binding sites for ubiquitin. We propose that the two sites are adjacent to one another and are the extended active site that binds two ubiquitin moieties of a polyubiquitin chain for isopeptide bond hydrolysis. We found that the ''activation site'' requires ubiquitin to have a free carboxy terminus and propose that this is the site that binds the ubiquitin molecule of the polyubiquitin chain that donates Lys(48) to the isopeptide bond. The ''inhibitory site'' is adjacent and binds the ubiquitin molecule of the polyubiquitin chain that donates the C-terminal Gly(76) to the isopeptide bend. Finally, we propose that these observations may have physiological relevance for the regulation of IPaseT activity since high intracellular levels of ubiquitin will inhibit continued hydrolysis of polyubiquitin chains.